Monday, September 20, 2010

Universal Travel Group’s cash balances: is there any way of testing whether the $43 million is really there?

In the last few days more than half of the float of Universal Travel Group has turned over. It is clear that the company has made some misleading claims about their website. Some claims are easily falsifiable - in particular the claim (made by press release) that the website offers comprehensive and timely travel information and services, including guaranteed low prices, high visual appeal, map support technology and easy payment functions.

Still – and despite this – people have purchased the stock on mass – perhaps lured by the low single digit stated price to earnings ratio – perhaps lured by the large ($43 million stated) cash balance. These are of course the same lure. If the earnings are not there the cash balances they generated are unlikely to be there (and visa-versa). And if the cash balance is there my short position in the stock is wrong.

So I needed a test of either the earnings or the cash balance. If I could falsify one then any case for owning this stock would evaporate.

I was criticized in the comments for not approaching management with my concerns – so I have asked management (by email) if they have an innocent explanation for what follows. They have not replied.

Interest earned (or the lack thereof)

Cash interest rates in China are between two and three percent. China does not have a zero interest rate policy. [See the amendment at the end of this article for further clarification.]

The company ended the March quarter with a stated cash balance of $37.833 million.

It ended the June quarter with a stated balance of $43.591 million.

It is reasonable to guess an average cash balance of $40 million.

At 2 percent interest yield (a lower bound) the company would be earning $800 thousand per year – or $200 thousand per quarter on that cash.

It reported interest earnings of $17,081.

No, I am not forgetting a zero. The company is reporting less than ten percent of what is a reasonable lower-bound for interest earnings on its cash balance. [It is less than half the interest that would be received using the lowest rate we can find in the official guideline deposit rates – see the post-script.]

Interpretations

I asked management if there was an innocent interpretation of this discrepancy – indeed I gave them a draft copy of this post. I have not received a reply. So I will provide an incomplete list of alternatives.

Firstguess: It could be that management are so incompetent that they have parked all this cash in a bank account without even asking for a market yield.

Second guess: It could be that someone is stealing the interest by say depositing it somewhere and having the interest shifted to another account.

Third guess: It could be that the accounts are wrong and the interest is being earned – it is just not properly reported by the company.

Fourth guess: It could be that the cash balance does not exist so it is not possible to earn $200 thousand per quarter – and that $17 thousand per quarter in interest is reflective of the real cash balance.

There may be another interpretation – but the company has not helped me. I am again reaching out to the company for help. They can now provide an explanation by press release and/or SEC 8K filing.

My guess

If I were forced to guess I would suggest the most likely explanation is that the cash balance is missing. The company has claimed to earn lots of money on what is a non-functional internet travel company. Its a fair guess – faced with this bit of corroborating evidence – that the earnings are not there and hence the cash balance is not there.

Reasons people are buying the stock

It is now absolutely established that this company does not sell travel in the way that they press released to the US capital markets. Even in Chinese there was no mechanism to allow you to finalize travel on the internet. (There have been some minor changes to the website over the weekend and in some instances you are sent to third party credit card clearing companies.)

This post gives you reason to question the rest of the accounts – to question whether the earnings are there (or indeed if there are any earnings) and whether the cash balance is there.

Still the clear thinking on this blog has not stopped people buying over 10 million shares at over $3 and sometimes over $4 each. Someone has a different interpretation. If they share it I will happily allow it in the comments. But my guess is that the cash and the earnings are not there. The company provided no alternative explanation despite repeated attempts to contact them.

John

First postscript: Official rates in China are above 5 percent. Banks in China are awash in deposits and do not feel compelled in any way to pay official rates.

There are guideline interest rates that one reader pointed me to – which range from 36 bps to a few percent – and are over 1 percent for 7 day call deposits. Large depositors earn more than these rates though how much more is in dispute. (I have looked at several Chinese companies and the 2-3 percent number I used was taken on much advice.)

That said – the company earned $17 thousand in interest in the quarter on average balances likely near $40 million. That is 0.17 percent per annum – or less than half the lowest interest rate in the table. The point is still made – the interest receipts and cash balances appear inconsistent.

It sounds like you did not cover in time. Or maybe you are seeing a chance for a second helping. I certainly hope it is not your ego! Well, more power to you.

As a side note, it does seem you assume a western legal and banking system in China. I know the behavior of people in Russia is quite different with regards to banks (compared to the west). FDIC and such. People are quite happy to have cash in the freezer even though inflation is high. Variance reduction.

Although savings account rate is indeed lower. I agree with you that more likely the cash account is fake. This is a rather wide spread suspicion for small companies traded in HK. One company that came to mind is Wuyi Pharmaceutical (01889.HK) which had over RMB 1b cash between 2007/08 but earned <8m interest.

That official rate is the 1Y lending rate. Interbank rates are published at http://www.chinamoney.com.cn/ (Chinese web site, but rates under section "Shibor"), which put an upper bound on large balances.

PBOC mandates both lending and saving rates, which explains the high NIM. Current official rates for deposits:http://www.boc.cn/en/bocinfo/bi4/200812/t20081223_508370.html

I was unable to find the whole set of policy rates in English on web sites of major Chinese banks, but luckily HSBC does that for lending rateshttps://www.hsbc.com.cn/1/2/misc/loanlendingAnd deposit rates on BOChttp://www.boc.cn/finadata/lilv/fd31/200812/t20081222_508225.htmlThese are the same for ALL banks operating in China.-Jon

John,If those are savings rates or even CD rates I don't know where you are getting those numbers. But I can guarantee you 5% is a bullshit number in China man. I lived there for some years. The only people who are getting that type rate are banks or maybe people renting out a second home. You cannot get interest rates like that in China.

Usually your number and analysis are dead on accurate (including 95% of this article on the travel agency). But I guarantee you if that 5% is a savings interest rate you are full of shit on that one my friend.

Let me add, but I just noticed some last comments between you and Jonathan Yan, first you think a few rich guys in coastal cities outweigh a gigantic population which saves money like you wouldn't believe??? Second even wealthy city dwellers would kill for that 5% rate John. The only thing non-bankers in China can get that rate on is real estate. PERIOD. You can e-mail that Michael Pettis dude and see what he says. Although my guess is he lives with his head a little in the clouds there, spending most his time on a college campus and with affluent Chinese, my guess is he will also tell you you are full of shit on that 5% number.

I give you your "props" you're usually right, but don't be too stubborn man.

I know that you are shorting UTA and thus, are likely to guess the worst possible scenario in order to scare others into selling.

With that said, I think there are MANY explanations for why the interest is only about $17k in the quarter.

First of all, you really don't understand how banks work in China and how interest rates are calculated there. Do you really think you can get 5% APR in China? Seriously, you can't be that naive.

Secondly, do you really think that UTA management is going to lock up $40 million in 1 year or 5 year CDs? Or any kind of CDs at all? Even with a large cash balance, money might be needed to complete acquisitions, to fund operations, to pay accounts payables, etc. etc. There numerous reasons why you DONT want to put your company's cash balance completely in locked-up CDs. What if you need it for an upcoming acquisition?

In any case...John, you really seem like a desperate short looking to shoot down the price of the stock for your own agenda.

Any person who's run even a small business KNOWS...you don't lock up all your cash in CDs because you might need it at some point!!

P.S. The company is probably NOT responding to your inquiries because they have pending litigation with you. Their lawyers are probably advising them NOT to respond to you because they feel you have stated libelous remarks on your blog about them. So it seems quite likely you won't hear a peep from them if they're planning to sue you.

"if the cash balances are fake, then why is interest income line-item not falsified?"

An interesting and illuminating question. John has demonstrated before that one way to spot a fraud is internal inconsistencies (e.g., quarterly percentage returns that are added rather than compounded to give an annual total), so this could be a revealing mistake.

It's also possible that the cash exists but is mismanaged (no one bothered to negotiate the rate on the large sum, or large portions are being lent out to directors as interest-free loans, for example), which is still a bad sign.

I have no position either way, but am thoroughly enjoying the detective story!

I came to your blog via this controversy and have stayed to read the whole thing. Most educative.

I have had a quick look at their 10-q and I can see two possibilities of you being wrong. 1. They had a substantial rights issue and acquisition in the first 6 months so your average cash balance could be way out. 2. Agencies do issue guarantees and l/c's to counterparties and the fees are sometimes netted off interest income by the accountants.

On a baser level I was amused to find that one of their subsids claims to be incorporated in the 'British Virginia Islands'.

--- Ms CEO's personal banking accounts are listed in their Chinese Website as one of the payment methods. ---

For company account cash deposit rate, if you check with the two banks that they listed in their Chinese website, you can find out that the banks do provide different attractive rates for companies, such as deposit in whole withdrew separately, 7-day call, 1-day call, etc. If the company really does not care about their cash, as long as the cash has been deposit into the bank and the balance has been kept at 500k RMB (about $75k), the worst rate they will get is about 0.81%, the interest should be 40 million * 0.81% = 324000 per year, or 81000 per quarter. Hope I did the math right.This link “http://www.cnutg.com/Partain/PayHelp.aspx” will open the payment help page of their Chinese version website. Open the page, let's divide the screen into roughly 4 quarters, the left upper quarter is “pay online”; the right upper quarter is “Pay by Credit Card”; then the lower two quarters together are bank transfers, lower left shows their company accounts, so far so good, but the lower right quarter shows 5 personal accounts, 4 of the account names are their CEO Jiangping Jiang, and another one is Fan Wu. BTW, their Chinese website dose not work well either. In Chinese, I did book a round trip domestic air ticket with returning date earlier than the departing date, they corrected it after John’s post. I did enter a non-existing date like Sept. 31 to book a hotel room, did not get any warning. Etc…. While I tried to make payment, I saw their CEO’s personal banking accounts are listed there. Why?

They made an announcement: SHENZHEN, China, Sept 20, 2010 /PRNewswire via COMTEX/ -- Universal Travel Group (UTA 4.37, -0.26, -5.61%) ("Universal Travel Group" or the "Company"), a leading travel services provider in China, today announced that it will hold a conference call at 9:00 a.m. ET on Wednesday, September 29, 2010, to discuss and answer any questions investors may have regarding the Company's business and financial statements. To participate in the call and have your questions answered, please email your questions by Friday, September 25, 2010, to Mr. Jing Xie, Interim Chief Financial Officer at the following email address: 06@cnutg.cn.

"We are fully committed to maintaining the highest standards of disclosure and maintaining the confidence of our investors and shareholders," said Ms. Jiangping Jiang, the Company's Chief Executive Officer. "In light of recent unfounded allegations casting doubt on the integrity of our business model and financial statements, management has decided to collect and address questions from investors in a conference call."

To participate in the call, please dial (877) 779-7834 five minutes prior to the 9:00 a.m. start time and reference conference ID number 12534724. International callers should dial +1 (706) 902-2087.

"Still the clear thinking on this blog has not stopped people buying over 10 million shares at over $3 and sometimes over $4 each. Someone has a different interpretation. If they share it I will happily allow it in the comments. But my guess is that the cash and the earnings are not there. The company provided no alternative explanation despite repeated attempts to contact them."

John, UTA has announced an investor conference:

UTA today announced that it will hold a conference call at 9:00 a.m. ET on Wednesday, September 29, 2010, to discuss and answer any questions investors may have regarding the Company's business and financial statements.

I think you should address your questions to the management team on Sept 29. They are obviously not afraid to answer your questions since they have hosted this Q&A session w/ investors.

So your questions of fraudulent reporting of cash, can be addressed to the management team on that conf call.

My suspicion is that they will answer your questions completely to your satisfaction because if they were trying to hide anything, they would most definitely not host a public conference call in this fashion.

For those who are repeatedly missing the forest for the trees: whether the rate is 5% or 3% or 2%, whether the company keeps it in liquid money market equivalents of 1 year obligations, whether the balance is $36M or $43M (or the $40M Hempton uses as his guesstimate)...

The interest doesn't add up. At best, management is incompetent with something as basic as cash management. At worst...well, the blog here has already alluded to the downside risk.

What those who are relying on the "it's China!" crutch don't seem to realize is that this company's on the NYSE. Getting delisted will equate to a significant decrease in market cap, no matter the facts.

I don't have a position long or short here, but jesus christ, think before you type.

With regards to UTA, yes for 6 month ended june 30 they had recieved 40712 vs 43.5m. That did give me a rather small % return 0.09% but remember they did complete 2 acquisition this year and had 20 million in equity finance. so if i deduct the 20m from the 43.5m which gives me a ball park of 0.17%

What kind of NYSE-listed company needs 9 days to prepare answers to basic questions about its business and financial statements?

One other explanation for the low rate of interest on the cash may be that the company's average cash balance was lower than stated because the company allowed management to borrow from the till with the *understanding* that they'd put it back later.

if the information in this blog....was at least correct, or at least have some research....and the autor was at least someone decent or respected...ok..

but the information is just wrong....

maybe, maybe someone with some brains...or at least a little imagination would think that maybe, maybe some of that money could be in US?? maybe some cash isnt in china....or maybe are at liquid investments that doesnt have that yields....

There appears to be no dispute in the comments that i) the website has negligible traffic, ii) does not really work, and iii) if it did work would still require a phone-call to actually book anything.

Could the posters who seem to be supportive of UTG please address these points?

JH: many thanks for the effort. BTW, UTG supposedly has auditors. I wonder if you might be able to make more progress by talking to them: they would presumably not want to leave any doubt whatsoever that the cash might not exist? Then again, UTG just seem to have acquired new ones for some reason: http://finance.yahoo.com/news/Universal-Travel-Group-prnews-3283804150.html?x=0&.v=85 . Still, I am sure that is perfectly normal too ...

I agree it's terribly fishy, but surely if a company is clever enough to fake the whole cash balance they must be able to fake interest income, no? How do you think they could be so careful in one are and yet so careless on the interest line? They have tiny crap auditors anyways so maybe it's not so hard?Thanks,Ryan

If there is one thing I have learned from my (admittedly limited) experience with fraudsters is that in the face of reasonable anaylsis on the part of shorts they resort to the type of petty name calling you see (hilariously mostly in Chinglish) in this comments section. I am buying puts tomorrow.

Hi John - Cash balances are often quite high in many Chinese companies. And quite often, disclosures are poor.

Example: Mindray technolgies has / had cash balances of $1 bn plus and still comes to the market for small ticket loans. This fails the smell test .. and so do many China companies on this front. The stated liquidity is simply difficult to test and verify.

My gut feeling is that liquidity is overstated for a higher than normal proportion that you'd see in other emerging markets.

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.